The attraction of banks as a yield haven in uncertain times has helped them gain more than 16 per cent over the past five months compared with an 11 per cent increase for the S&P/ASX 200, with the prospect of special dividends offering further allure.

Strategists are divided on the impact of the rate-cutting cycle on banks, with some pointing to the prospect of improved loan growth while others warn a stuttering economy is a greater burden on lenders.

Bell Direct equities analyst Julia Lee agrees the low credit growth backdrop is a challenge for banks, with the likelihood of more cost-cutting to maintain revenue growth.

AFR
AFR

“Valuations are starting to look a bit strained but [the banks are] more an income investment than for capital growth and their yields are still really attractive," she said.

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Forecast 2013 dividend yields for major banks range from about 6 per cent to 8 per cent, against expectations for relatively flat earnings.

Reflecting some of these trends,
ANZ
posted revenue growth of 2 per cent for the financial year to September, with a 4 per cent boost to its final dividend and its best cost performance in a decade.

National Australia Bank
will release its results on Wednesday after already warning it would increase bad debt provisions by $250 million, due to lower expectations for Australian economic growth and ongoing deterioration in the UK.

Westpac will report next week.

Wilson Asset Management chief investment officer Chris Stott views the banks as fully valued, with anaemic credit growth for as long as five years ahead.

“Bank reporting season so far tells us that the economy is struggling and will continue to unless rates are cut further or there’s a lift in sentiment and a return of credit growth," he said.

On the bright side, Mr Stott pointed to the prospect of capital management in 2013, with buybacks or capital returns likely given solid capital positions for major banks.

He said bad debts would likely remain under control given banks’ strict credit policies. He favours ANZ on a valuation basis, viewing Commonwealth Bank as expensive.

Another fund manager suggested selling banks at current levels and buying after they paid dividends or during dips in the coming three to six months.

Many brokers are cautious about the outlook. Credit Suisse analyst Jarrod Martin said bank valuations were close to fair value.

“Other sectors of the economy feel stress first and banks get the bad debts late in the cycle," he said.

Mr Martin said an uptick in bad debts was likely but not a full-blown credit cycle, given that large institutional borrowers reduced their debt levels earlier in the global financial crisis.

Instead, he said, debt stress was more likely at the mid-market level.